As Pablo Fernandez, Professor of Finance at IESE Business School, observed: “Value should not be confused with price, which is the quantum agreed between a seller and a buyer in the sale of a company.”

Market price is what someone will pay today. Intrinsic value is what the business is actually worth. The difference between these two figures can make you wealthy or bankrupt.

When Market Price Exceeds Intrinsic Value

The technology acquisition frenzy of 2021 perfectly exemplifies Professor Fernandez’ position. Established businesses threw money at digital startups like confetti at a wedding. One logistics company paid fifteen times earnings for a delivery app with no defensible technology and mounting losses. The app folded soon after purchase..

Competitive bidding creates FOMO madness (Fear of Missing Out). Rational business owners transform into auction bunnies, bidding beyond any reasonable return simply to “win.” The prize frequently becomes their punishment.

When Intrinsic Value Exceeds Market Price

These situations separate the astute from the amateur. During the rental crisis present during COVID, a café owner purchased three struggling competitors. While others saw problems, he recognised quality locations with temporary difficulties. Eighteen months later, his purchases  generated twice the original turnover.

Family crises and feuds create opportunities for buyers. When siblings cannot agree, quality businesses often sell at substantial discounts to their true worth.

The Right Approach

Accurate assessment of SME’s requires looking beyond the numbers. What generates sustainable profits when the current owner departs? Can the systems operate without constant supervision? Most importantly, what prevents competitors from simply copying the model tomorrow?

Both tangible and intangible values might be hiding in plain sight. The “books” show historical cost, not today’s value.

Three Key Takeaways

First, market price and fair value rarely align. Sellers invariably meet desperate buyers above intrinsic value. Desperate sellers meet predatory buyers below it.

Second, market timing trumps market analysis. The same business could trade at three times earnings during a recession and twelve times earnings during a boom.

Third, quality businesses bought cheap outperform trendy businesses bought dear. Patience and precision defeat speculation and sentiment.

Action Plan:

The marketplace rewards those who understand the difference between cost and worth. While others chase headlines and hype, focus on acquiring fundamentals and value rather than a steal.

Professional valuations provide clarity when emotions can cloud judgement. Independent analysis reveals what sellers prefer to hide and what buyers need to know.

Consider this: if you cannot determine what you are really buying, how can you be certain you are not being sold?

Ready to understand the true value of your business opportunities? Contact Kevin Lovewell on 1300 551 757 directly.